When Government of Nepal (GoN) does not mobile the money deposited in the Prime Minister’s Disaster Relief Fund to relieve the landslide victims of Sunkoshi, the inefficiency of our government speaks for itself. A month past the landslide, there has been no relief program whatsoever from the Government; neither has there been any clarification on why the fund is staying idle.

Natural disasters strike elsewhere as well. But when they do, the governments at least makes some relief effort. Following the Jammu and Kashmir flooding, Modi was quoted as saying, “Don’t celebrate my birthday, instead help in J&K relief work”. It all depends on the choice that the government makes.

Let’s consider following scenario

Say, you have 3.4 lakhs in the bank and say the following things happened in your family:

Your younger sister slipped in the bathroom as she was bathing and broke her leg. She is crying in great pain.

Your boss thinks you are an invaluable asset to the office. He is coming over to see you today. He might just hand you a promotion today.

Your parents are migrant workers. You are supposed to admit your sister to a nice college, which you have not been able to find some time for. Fearing panic, you mention nothing of the accident to your parents.

After hearing of the accident, your friends are offering to help. They are giving you some money in this difficult time.

Furthermore,

You know the medical expenses will be less than 0.4 lakhs – which is the immediate cost for relief.

You don’t have the best of relations with your sister. You were supposed to admit her to a college some 6 years ago, but you used the money from your parents to enjoy on your own. You think she cannot lead a responsible life herself and control all her finances. She does not trust you.

So here are a few things you can do in the short run:

Treat your sister immediately: call an ambulance and run for the hospital immediately.Your boss can come some other day.This might re-build your relationship with her.*

Send your sister in the ambulance and attend your boss. This way she will be treated but your relationship remains the same.*

Ignore her crying, go and convince her that nothing has happened even if you see her leg in two pieces. You could buy a new Pulsar 220 with the bank balance instead.

Ignore her completely.

(* will cost you money, your bank balance will decrease)

In addition you have the following constraints in the long run:

You have to make your parents happy so that there is no panic in the family.

You have to manage your sisters’ education so that she is successful in life later.

Now let’s go back to the main story. If I were the Government of Nepal,here is what my sister’s accident would look like

My sister would be the landslide victims of Sunkoshi who NEED immediate relief

My bank account would be the Prime-minister’s disaster relief fund. 3.4 Lakhs would shoot up to 34 Crores

My parents would signify the international society as a whole

My boss would signify the head of donor agencies (Or Modi who visited recently?) that fund a significant amount of the fiscal budget of the country

Education would signify the constitution and the economic prospect of the country.

The relationship with my sister would signify the relationship the Government shares with the citizens of Nepal.The postponement of education is the same as the postponing of the constitution.

My friends would be the corporate institutions which donated to the relief fund.

What is GoN doing at present? The government could do 3.2 if not 3.1. But it is not even doing that.The closest answer seems to be 3.4.

All governments do not have to be incompetent by default, but the actions of GoN leaves room for some serious criticism, more importantly, if simple things like this cannot be done, what more are we to expect?

History dictates, without some level of patriotism, the economy of a country has seldom prospered: Japan- after the Second World War, South Korea – after the 60s and the US after the great depression. There was always some nationalistic slogan- without which prosperity there is often questioned. How does Nepal relate to these instances?

Most of the popular cyber criticisms aroused here relate to patriotism in terms of birth place of Buddha, expressing anger over a comedy show in the US which makes fun of Nepali diplomats not speaking proper English, or even remarks over Kumari and the shape of our flag, Mount Everest being in Nepal and so on. Most of these cases deal with natural phenomenon, historical coincidences and other minor attempts to make ourselves unique in the global arena, like the shape of our flag, or the mercenaries who originated from our nation and achieved in wars fought by other countries. It has always been unbearable to us if any of these integrities are questioned. All of these integrities that we have held so dear to our heart have one aspect in common- we never worked for any of these aspects that we are proud of.

Take the case of Lord Buddha being born in Nepal. It was one of the main agendas of the deliberation made by the Indian Prime Minister Modi at our Constituent Assembly. Strategically set, and aimed at garnering public support in Nepal. It was not because of some planning by us Nepalese or any other achievement that led to Buddha being born in Nepal. It was sheer coincidence. He could very well have been born across the border if only some of our historical treaties had been twitched a little. Moreover, the cyber critics and anger they display, every time this fact is questioned don’t state any logic on why this aspect is so much of an importance to us. Are we, as a nation, so insecure that no other human achievement made in our land stands out in this respect and therefore we need to state the same fact in our hundred rupee bill? Robin Sharma, the motivational speaker and the author of the book ‘The Monk Who Sold His Ferrari,’ was also born in Nepal. That doesn’t make him a Nepali citizen! Nationality and birthplace are very different aspects. Even more so, at a time when neither Nepal and India, nor these nationalities existed. There is a greater issue that surrounds this matter.

Why isn’t our patriotism reflected in the poor GDP per capita we have, or the political mess we are in, or the dysfunctional systems we have in our country? According to the World Bank data for 2013, our GDP per capita ranks 170 out of the 189 countries studied. The CIA fact-book shows we stand 176th out of the 191 countries studied. So basically, we are nowhere. If we look at the ease of doing business, we rank 105th out 189 countries; corruption perception index by transparency international ranks us 116th out of 175 countries; education index by the UN ranks us 153rd; the Human Development Index ranks us 145th out of 187 countries; WHO’s world health care index ranks us 150th. Look at any other index. We stand close to the bottom. Our patriotism would yield some result if the national sentiments were centered here.

The Asian Tigers should serve us as inspiration. Each of these places was in a pretty displaced state before the 1950s. National focus of these countries was strengthened because of exemplary leaders like Lee Kuan Yew who transformed Singapore from a third world country status to where it is at present. Though other countries among them have their own rich history that drove them to the present level of economic success, their national value system was never limited to patriotism fettered with identity and geographical pride. An economic priority was always there, talk about the “Chaebol’s” in .South Korea or the “Keiretsu’s” in Japan- the economic priority was always juxtaposed into the national priority.

In the long run, a patriotic shift towards economic and growth related issues would trigger something of the sort that was experienced by the Asian Tigers in us as well. The very reason behind the sorry state of our economy is that people are not aware of issues at all. For instance, the Upper Tama Koshi Hydro IPO is planning on issuing thousands of shared to government officers (CIT, EPF and Beema Sansthan) who don’t have a stake in the investment at all. If someone were to ask why they are getting those shares, there is not logical argument to be made. The same way, if our patriotism were to shift a little to the activities of Nepal Rastra Bank or the policies that govern doing businesses in Nepal, a lot of the government activities would have to be more accountable to the people than they are at present. Why is the rate of interest what it is at present? Why aren’t bonds being issued for profitable hydro prospective? What is happening to the tax money? Why is our fiscal tool only limited to the Budget Speech once a year? And so on.

Stephan Dercon, the chief economist of DIFD and the professor of Development Economics at Oxford, in many of his works argues that the norm and value of the nation as a whole is more important the competency and qualifications. Simply, if the value system of a country isn’t committed to making a change it simply cannot spring up. This raises a simple question of our patriotism and value system. Why isn’t it focused on economic growth and prosperity? Why is our sentiment fixed around issues like the birthplace and the natural records our country claims? Has our patriotism already accepted economic failure so fast? Is our patriotism that displaced?

The past week has been packed with 3 events in Nepal that test our fundamentals as a nation which are as the following (chronologically):

Landslide in Jure and subsequent flood in Sunkoshi River (Saturday, 2 am)

The visit of Indian Prime minister Narendra Modi (Sunday, 10:50 am)

The death of Dinesh Adhikari, alias – Chari (Wednesday, around 6 pm)

As Former President of the Philippines quotes, crisis is the crucible that forges a nation’s destiny. That huge a destiny shaping event might not have been in case for Nepal this week, but a lot can be said from these three events about the path we are heading to, our social mindset and the flaws of our prioritization.

Chronologically, it’s really interesting how our parliament was tested on the prioritization between relief efforts in Sunkoshi and the visit of Narendra Modi. There were a few prominent issues like the fact that Chief Secretary Mr. Leelamani Paudel, cancelled his trip to the landslide affected area and unfortunately, even the media overlooked this issue.

“The idea that rich Western countries should provide large amounts of “developmental aid” in order to solve the problem of poverty in sub-Saharan Africa, the Caribbean, Central America, and South Asia is based on an incorrect understanding of what causes poverty. Countries such as Afghanistan are poor because of their extractive institutions — which result in lack of property rights, law and order, or well functioning legal systems and the stifling dominance of national and, more often local elites over political and economic life. The same institutional problems mean that foreign aid will be ineffective, as it will be plundered and it is unlikely to be delivered where it is supposed to go. In the worst-case scenario, it will prop up the regimes that are at the very root of the problems of those societies.”

So, does our government also function as an extractive institution? And does this render in a larger picture that, the USD 1 billion given as soft loan by the Indian Prime-Minister will prove to be “ineffective”? The answers to these questions can be found in last element of the previous chronology- the killing of ‘the Don’ Dinesh Adhikari, alias- Chari.

Parliament in Session

The very question of our political parties being based on the mafia culture and our politicians doing their dirty work with the help of goons has been floating in our mainstream media for a very long time. But when the news of CPN-UML leaders (Gangalal Tuladhar, Rajendra Pandey and Bhumi Tripathi) presenting themselves in the official residence of the Minister of Home Affairs to advocate the death of Mafia Chari came, the answer to these questions surface themselves.

This point is economically valid because it gives color to the social preferences we have. In any other nation, be it India or the USA, has any political leader gone to the government and advocated for the extortionists’ (on the run) human rights?

Arrow’s impossibility theorem has this famous condition I – the Irrelevance of the Irrelevant or “independence from irrelevant alternatives”. Indeed, this proves that no system in the world is ever perfect. But it seems, in majority of systems working efficiently, this condition is well covered – the irrelevant alternatives are rendered irrelevant. Unfortunately again, in Nepal, it’s the exact opposite – they are relevant. Arguing the human rights of Chari when other major issues are at stake in the parliament is an irrelevant alternative – if this is given weight than the bias towards this agenda is promoted and the relevant alternatives like the relief to Sunkoshi victims are pushed aside.

This creates a beautiful link between the extractive institutions and irrelevance. Simply, extractive institutions are irrelevant to the functioning of a nation. Prioritizing extracting institutions hinders growth, and the turn of events during this week proves that we are making this exact mistake. As rightly quoted before, the dominance of national and local elites over political and economic life is exactly what is emerging out of these issues – which again offers a huge political backing to the youthful population, consequently dragging them into burning a college library to ashes and the likes.

We have to get our priorities right, and we have to declare the irrelevant issues irrelevant once and for all.

The reason someone saves or invests is because there is a prospect of return in future; the higher the risk, the higher the return. The same consensus guides anyone who parts with some of his/her monthly income to put it in institutions like Citizen’s Investment Trust (CIT), Employees Provident Fund (EPF) or even bonds issued by the Government of Nepal (GoN). The basic understanding is, as the government stands guarantee on these loans, there is not much risk involved, if any. But how big a risk are we taking by not knowing which circle our money is circulating in?

Increasing Access To Funds

One among many circular paths of money in institutions here in Nepal is the loan to Nepal Oil Corporation (NOC). In the last 10 years, the only year NOC made any profit was 2009/10 (NRs. 3.31 Billion). The losses cumulated since 2002/03 until April, 2014 stands at NRs. 45.53 Billion. This amount is increasing with NOC’s increasing access to funds from CIT, EPF and The Government of Nepal (GoN). NOC has received NRs. 33.921 billion straight out of the taxpayers’ pocket. The total outstanding interest amount to this loan stands at NRs. 2.04 Billion.

The fact that NOC has losses in billions in the last ten years gives rise to the question – how will NOC pay the loan? Currently, NOC has been paying interests while not even a fraction of the principle has been re-paid. On the contrary, the loan amount has been increasing, with new imports from IOC as NOC fails to recover its investments on every import. This gap again is covered through loan from taxpayers’ money.

Can Noc Pay Back Loans?

NOC’s volume of transaction stands at NRs. 160 billion per year. It has absolutely no act governing its activities.Then there is loan worth another billion of Rupees. All these facts beg the answer to the fundamental structural question – How is NOC going to pay the taxpayers’ loans in future? Furthermore, what is the tipping point of taxpayers’ confidence? How much more loans are we to give before actually realizing that the bubble is too big? When will the bubble burst? How will we get our fuel in the future amidst the whole financial mess?

Credit Bubble

The financial crisis of 2008 also happened because of a credit bubble. The Lehman Brothers collapsed because their leverage ratio was so large that the decline in house prices wiped out their entire asset base. Their credit was largely based on the toxic credit (CDOs – Collateralized Debt Obligations) derived from the American housing market. The major difference here between NOC and Lehman Brothers is :

1. Securitization- most of Lehman based loans were insured and sold (the securitization food chain);

2. Lehman worked under market conditions and did not fix prices;

3. The American Government did not stand as guarantee on loans that the company acquired.

The major similarity between the failed Lehman Brothers and the soon to fail NOC (if no changes are made) lies in the fundamental financial structure of the two organizations – the leverage. According to Creditfix, the simplest and most widely known measure of the leverage ratio is the ratio of debt (total loans for that time period) to equity (the total value of the company at that time period) – known as debt to equity ratio.The leverage ratio of Lehman Brothers increased from 24:1 in 2003 to 31:1 in 2008. Having a leverage of 31:1 meant that a 3.3% decline in the value of assets was enough to wipe out the whole company.

Debt-Equity Ratio

If we look at the current leverage of NOC, the debt-equity ratio turns out to be 332:1 for the year 2012/13, and the estimated ratio for the year 2013/14 increases to 344:1. This means, for every Rs. 1000 of your money invested in CIT or EPF and given as loan to NOC, NOC takes a risk equivalent to Rs. 344,000. This means that even if there is a 0.29% decline in asset value of NOC, your Rs 1000 is rendered worthless – they simply go bankrupt. This risk is 10 times greater than the risk that Lehman Brothers took which brought them down in the 2008 financial crisis.

How big a risk is this really?

The debt-equity ratio, calculated by the Ministry of Finance is based on that fiscal year’s loan. The cumulated debt-equity, which is the ratio of the cumulated debt till date to equity, amounts to 405:1 (refer to the table). This means that in actual terms, a 0.25% decline in NOC’s asset wipes them out in totality.

The depreciation percentage given in the Yellow book published by the Ministry of Finance itself dictates that this is alarmingly larger than 0.25% of the total equity value.

This means, NOC has been theoretically wiped out many times already.

Negative Net Worth

In investment science term, NOC is worthless with a net worth of approximately negative Rs. 25 billion. In this context, the structural aspect of NOC and the price control regiment they practice – which makes even more losses, makes this body one of the most debated and politically protected bodies in Nepal.

NOC takes loans every year to import petroleum products, and this is increasing by the year. The risk of this loan is undoubtedly high. In addition to this, there is a convoluted bureaucratic labyrinth protecting this unacceptability. It is only a matter of time before the credit bubble bursts. When that happens, the government institutions including NOC will still be on a lower loss than what we consumers have to bear. How big a risk are we really taking?

I started my research by going through the Yellow Book produced by the Ministry of Finance. The Yellow Book is the accounting performance review of public enterprises in Nepal. If there is any doubt on financial matters or anyone wants to know how tax payers’ money is being used in the public enterprises in Nepal, this is the go-to book.

When it’s a work of the government (publishing the Yellow Book!), somehow, I had this notion of absoluteness – soon to realize most of the figures were manipulated – manipulated to the extent that there were mistakes; blunders – some so shameless that an elementary school student could spot out! But hey, some of those could have also been human errors – we all make them. Nevertheless, if you spotted only one error in such an important document, that reason might be validated; if there are mistakes in almost every section of the book – to the extent that you could write 20 blog posts on it, now that’s a different story.

Let’s look at a few of those which are the simplest and funniest:

1. The basic Profit calculation.

This can be done by any layman. We know that Profits in the simplest form is Cost subtracted from Revenue. Profits (π) =Revenue (p (q)*q)-Cost(c(q) ).

This picture is from the 90th page in the Yellow Book, 2070 (2013 A.D). If you see the fourth column, it signifies the actual operating profit calculation in the year 2068/69; the profit is calculated to be negative NRs. 323 Lakh. You do the basic math now.

Subtract NRs. 30675 Lakh (Operating Cost) from NRs. 33123 Lakh (Operating Revenue)- you must get +NRs.2448 Lakh provided you do it correctly. The calculation published by the Ministry of Finance says this figure is a negative NRs. 323 lakh. This is a difference of NRs. 277100000!

The other years are correct, provided you do the same; you could subtract and see for yourself.

The story behind this manipulation (assuming this is not one of the hundred human errors in the Yellow Book): The above table is about Agricultural Inputs Corporation Limited (AICL). This is the government body in Nepal which distributes chemical fertilizers throughout the country, with transactions worth billions as you can see from the table itself.

During the year for which the figure was manipulated, or rather deliberately shown as a loss, there was a shortage of chemical fertilizers in the Nepalese market. During the past two consecutive years there was a shortage due to limited subsidy.This created a big black market.

I really cannot pin point why AICL wanted to show this figure as a loss on their assumption that the people were so foolish that they could not subtract and see for themselves. But one guess I have is because they wanted to show that they worked to the extent of loss. You judge it for yourself.

You could do the same for the 95th page. All calculations here for the operational profits are erroneous.

The joke is that with the administrative staff that makes such erroneous calculations, gets paid in millions of rupees, as you can see in the above table.

The same errors on the 110th page of the Yellow Book, the same argument for administrative costs hold!

2. Formulae given in the end – they forgot to follow themselves!

This can be found in the last page (302nd) of the yellow book. I want you to notice the last formula conveying the debt to equity ratio.

Notice the debt to equity given for the year 68/69 is 305:1.

From the table above

Long term loans are: NRs. 247710 Lakhs ( Sn: 27)

Loans that exceeded the durations are: NRs. 70610 Lakhs (Sn: 29)

Current Liabilities are: NRs. 47321 Lakhs (Sn. 16)

Share holder’s funds are: NRs. 967 Lakhs (Sn 22)

If we follow the formula, the considered loans are all the loans except for current liabilities. This amounts to NRs.318,320 Lakhs (27+29). If you follow the formulae and divide this amount by the share holders fund you should get the figure 329.18, the mentioned debt equity is 305.

These are only few of the many errors that one finds in the yellow book. Print mistake, tabulation mistake, human error has it place, but the amount of mistakes in the book baffles the reader and gives them a clear impression of carelessness and even arbitrariness in coming up with the mentioned figures. Somehow the administrative costs don’t administer when it comes to the government.